Who Will Audit the Auditors?

This article also appears in the new Summer Issue of the Manhattan Institute’s City Journal magazine.

State and local bureaucracies often abuse their taxing authority.

The Internal Revenue Service’s targeting of conservative groups has revived old fears about the agency’s vast taxing and auditing powers, so easy to abuse. But the IRS isn’t alone in holding those powers. Across the country, states and municipalities have endowed thousands of revenue and audit bureaucracies with similar capabilities. Critics complain that officials use these entities to harass enemies and help allies. The evidence makes clear just how well-founded those concerns are—especially since these agencies typically receive far less scrutiny than the IRS does.

Under the administration of Democratic governor Bill Richardson, New Mexico’s labor department sparked controversy in 2006 for auditing the state’s Republican Party. The audit, launched shortly after the party criticized the governor harshly, was meant to examine whether it was complying with state laws on employment taxes. After initially claiming that a computer had randomly chosen the GOP for scrutiny, the state admitted that an employee of the labor department had selected the party. Under fire from state newspapers, the Richardson administration turned the audit over to a private firm. The controversy faded after the firm found the Republican Party “squeaky clean,” as the Santa Fe New Mexican put it, though the paper noted that the audit was “more harassment than just due vigilance on the labor department’s part.”

Taxing and auditing to silence critics can backfire. In 1997, when the Puerto Rican newspaper El Nuevo Día ran a tough article about the island’s governor at the time, Pedro Rossello, the Rossello administration pulled $6 million in government advertising from the paper and conducted a tax audit of a construction company owned by El Nuevo’s publisher. The newspaper sued and the administration settled, promising that its future actions would be “based on legitimate, non-retaliatory reasons unrelated to news coverage.”